A former advisor to China’s central bank announced that Evergrande’s debt crisis will slow down China’s economic growth. However, it will likely have minimal spillover on the country’s financial system.
As we know, Evergrande is the world’s most indebted property developer, which has total liabilities of about $300 billion. The firm has been struggling to pay its suppliers and warned investors it could default on its debts. Remarkably, one key payment is due as soon as this week.
According to Li Daokui, formerly an advisor to the People’s Bank of China, the impact is on the real economy because there’ll be a slowdown in the development of many projects.
He added that the real property market will affect the GDP growth rate for 2022 because of slower finance for the sector.
Li announced that a default by Evergrande will have a small effect on the Chinese financial system and says that there aren’t derivative instruments built on the firm’s debt.
As we know, derivatives are complex financial securities that derive value from an underlying asset. Traders use derivatives for different purposes, such as hedging a position and speculating on the underlying asset.
Li also says it’s too early to predict what’s the net impact of the crisis.
The Asian Development Bank kept its growth forecasts for China at 8.1% for 2021
On Wednesday, the Asian Development Bank announced that it has kept its growth forecasts for China at 8.1% for 2021 and 5.5% for 2022. Remarkably, that would be an increase from the 2.3% expansion last year, when the Asian country became the only major economy to rise. As we know, most global economies were and still are suffering due to the coronavirus pandemic.
Additionally, Evergrande is scheduled to pay interest on a bond worth $83 million on September 23. This is the first test of its debt crisis. Many analysts anticipate Evergrande to miss the payment.
Li also added that defaults by Evergrande will likely slow down the progress of development projects around China. He predicts that it will hit local economies in mainland China.
The economist stated that this could push local and provincial governments to step in with their own money to keep those projects going.
Li also says that China’s central bank will add liquidity in targeted sectors. This is to ensure the spillover from an Evergrande default will not travel too far too quickly.
According to Li, in the medium to long-term, the embattled firm will likely be dissolved into four main groups. These will be finance, property development, electric vehicles, and other commercial ventures.
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